The IndustryWeek Value Chain Survey: Procurement -- Not All Dollars And Cents

Looking to rein in costs and reap potential savings from your supplier network? If so, you aren't alone.

Even during booming economic times, controlling the costs of materials and components has always ranked as a high priority for manufacturers. And why not? Even among manufacturers for whom materials aren't the primary cost of a finished product, they still remain a leading cost. They also remain a leading concern.

Just how important is the development of a reliable supply base to a manufactured product's success? "Sometimes it's critical; sometimes it's important," says PwC Consulting's Gregory Spears, senior consulting manager. "For some products, like technology products -- which have a very short shelf life -- it's very important [Manufacturers and suppliers] truly must be partners. [Suppliers] have got to be in lock step with you."

In the case of computers that bear the "Intel Inside" tag, the supplier's name is actually part of the finished product's branding, Spears points out.

The IndustryWeek 2002 Value-Chain Survey, conducted in conjunction with PwC Consulting, shows that manufacturers are deploying a wide array of programs and practices to better manage sourcing, procurement and supplier management efforts in today's cost-constrained environment. Many of those programs revolve around the deployment of collaborative practices, both internally and with supplier partners.

The data also illustrate the struggle by manufacturers to assimilate electronic technologies into the procurement process. It bears noting that for most manufacturers, choosing a supply base is more than a dollars-and-cents decision. Nearly 81% of the procurement survey respondents give total cost of ownership, rather than simply initial price, at least "a fair amount" of consideration when sourcing materials. Almost 39% said they give this practice -- which looks beyond price to quality costs, transportation costs, delivery requirements and the like -- "a great deal" of consideration.

The survey data show that larger companies are more likely than their smaller counterparts to focus on total cost when sourcing, perhaps because they can afford to be less cost-focused.

A glimpse at the internal workings of companies' procurement processes suggests a less structured approach than one might imagine, given the dollar volumes that pass through those processes. Survey data show that fewer than half (47%) of all survey participants employ formal sourcing teams that involve cross-functional participants and some formal time commitment.

Also somewhat surprising is this finding: Nearly 46% of respondents report that their companies have one-quarter or less of total purchasing dollars under contract with suppliers, while another 25% said a quarter to half of total purchasing spend is under contract. Why is this noteworthy? Generally, says Spears, "You're going to get the best value for your dollar" with contractual arrangements -- even short-term deals.

Still, some 30% of the procurement survey respondents report that their research-and-development or engineering departments are extensively involved in sourcing efforts, while nearly a quarter (24%) say the same of their suppliers. One-fifth (21%) indicate extensive participation in sourcing by representatives from production or manufacturing. Not surprising, 83% of companies say that purchasing extensively participates in sourcing efforts.

Manufacturers have embraced a variety of supplier-management practices as a means to establish or improve partnerships. Half of the survey respondents have reduced their supplier base in the last three years, with a majority doing so via formal supplier-reduction programs. As a result of forging closer ties with fewer suppliers, total costs have dropped, they say. How much? For more than a quarter of respondents (28%), total costs declined by 11% or more. The greatest bulk of respondents (41%), however, report a drop in total costs of 6% to 10%.

Tried-and-true collaborative arrangements -- designed to benefit both parties -- remain key components in supplier management. Nearly two-thirds of survey respondents offer suppliers long-term contracts in return for reduced costs, and more than a quarter (27%) use the practice extensively.

Other supplier management programs that are employed by half of all respondents include supplier improvement programs; data, forecasting and design sharing; supplier-managed inventory; and single-sourcing programs in exchange for lower costs.

One glaring exception to the generally collaborative nature of the supply-management practices in wide use are contractual obligations for annual cost reductions. (The Big Squeeze). Nearly 56% of all survey respondents use this practice at least "a fair amount," with 13% saying they use it "a great deal."

And what of e-procurement? The increasing deployment of electronic technologies, particularly over the Internet, opens new opportunities in procurement, says Bob Sklenar, purchasing manager for Mercerville, N.J.-based Congoleum Corp., which manufacturers sheet and tile flooring. He predicts that the growing use of electronic technologies in the procurement function will help raise procurement to a more strategic level than it currently enjoys. "It affords you so much more data that you can turn into valuable information," he says.

Congoleum, Sklenar says, is in the "exploration" stage of electronic procurement. "We're going at it slowly but methodically." That may be the case for other manufacturers as well, given their responses to several survey questions that address the use of electronic technologies.

Few manufacturers conduct the bulk of purchasing transactions via the Internet, electronic data interchange (EDI) or via some other electronic technology, according to survey data. In fact, nearly 59% of respondents conduct 10% or less of their transactions via these methods, and more than three-quarters (78%) conduct 25% or less via electronic means.

The Timken Co.'s Faircrest Steel Plant, Canton, Ohio, is an exception to the rule. Throughout the day the plant, which makes steel billet, sends electronic purchase orders across the street to an adjacent "Supplier City," where many of its key suppliers have set up shop. "It takes milliseconds and costs less than 50 cents per P.O.," says Timken's Joe Wonsettler, manager, MRO sourcing and procurement.

The simple fact is many e-business technologies required for procurement simply have yet to be adopted widely. Some 42% of survey respondents have not adopted an e-procurement system, excluding EDI, and 41% have not adopted the use of online auctions or exchanges as a procurement vehicle. Although, some 58% of respondents are using auctions or online exchanges, even if not extensively.

The electronic technology cited in the greatest use was electronic funds transfer. Even when electronic technologies hit their stride "there's always going to be a certain amount of the human element required," Sklenar says.